📰 GST reform needs a new grand bargain
The GST compensation issue strengthens the necessity for a new system between sovereign and sub-sovereign entities
•Three years ago, the Centre and the States of the Union of India struck a grand bargain resulting in the launch of the unified Goods and Services Tax (GST) era. The States gave up their right to collect sales tax and sundry taxes, and the Centre gave up excise and services tax. The nationwide GST promised frictionless commerce across State borders,buoyant and leakproof tax compliance, and removal of inefficiencies like the cascade of “tax on tax”. This historic grand bargain was the result of painstaking consensus building, which inter alia involved addressing the apprehension of States, of revenue loss due to the GST.
Abdication of responsibility
•Their consent was secured by a promise of reimbursing any shortfall in tax revenues for a period of five years. This reimbursement was to be funded by a special cess called the GST compensation cess. The promised reimbursement was to fill the gap for an assured 14% year on year tax growth for five years, and it was generous to a fault. Neither the national aggregate nor any of the major States had this record for the previous five years.
•But that was not the only fault with the design, which had also failed to learn from the successful design of harmonising Value Added Tax (VAT) rates across the nation, implemented just a decade ago. VAT was the precursor to GST and also needed a consensus. That design too had an inbuilt reimbursement formula. But that tapered over the years, making room for incentives for tax effort from the States, sort of “skin in the game”.
•As the economy battles a pandemic and recession, the tax collection has dropped significantly, while expenditure needs are sharply higher, especially at the frontline of the battle, at the State level. But it seems that the States have been told that they are on their own to meet the shortfall in revenues. Using an equivalent of the Force Majeure clause in commercial contracts, the Centre is abdicating its responsibility of making up for the shortfall in 14% growth in GST revenues to the states.
The onus is on the Centre
•This is wrong on many counts. First, the States do not have recourse to multiple options that the Centre has, such as issue of a sovereign bond (in dollars or rupees) or a loan against public sector unit shares from the Reserve Bank of India. Second, the Centre can anyway command much lower rates of borrowing from the markets as compared to the States. Third, in terms of aggregate public sector borrowing, it does not matter for the debt markets, nor the rating agencies, whether it is the States or the Centre that is increasing their indebtedness. Fourth, fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilisation, which is the Centre’s domain. Fifth, and most importantly, breaking this important promise, using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.
•Cooperative federalism is in the nature of a “repeated game” between the two entities, and every action must think of the future consequences, not just the immediate ones. Will it not weaken the foundation of trust?
•Kautilya too would have advised the sovereign against reneging on the promised bailout, as fulfilling the obligation helps build trust with sub-sovereigns.
The Australian example
•The issue of GST compensation to the States is just the latest in the bumpy three-year journey of the new tax design. It is clear that the design needs a radical overhaul. Just tinkering with the compensation mechanism, or frequently changing rate slabs, or pushing more goods in the “sin tax” cess category, to earn revenue that is not shareable with the States, is not the way forward. What we instead need is a Grand Bargain 2.0 between the sovereign and the sub-sovereign entities.
•What would this be based upon? We have to go back to first principles. GST is a destination-based consumption tax, which must include all goods and services with very few exceptions, such as food and medicine. That widening of the tax base itself will allow us to go back to the original recommendation of a standard rate of 12%, to be fixed for at least a five-year period.
•A comparison with Australia which also coincidentally shares its GST anniversary with India, is apt. For the past two decades their GST rate has been constant at 10%. Of course India’s single rate of 12% has to cover petrol, diesel, electricity, transport and real estate as well. Some extra elbow room for the States’ revenue autonomy is obtained by allowing the States non VATable surcharges on a small list of “sin” goods such as liquor, tobacco, polluting goods such as sport utility vehicles, and industrial fuels such as diesel, aviation turbine fuel and coal. A low moderate single rate of 12% encourages better compliance, reduces the need to do arbitrary classification and discretion, reduces litigation and will lead to buoyancy in collection.
•Incidentally this redesign will scrupulously avoid the bogey of a “revenue neutral rate” (RNR) which needlessly occupied the attention of lawmakers and officials. GST is a long-term structural reform, while RNR is a short term and basically an elusive concept. In the long term there are many changes in consumption patterns, production configurations and locations, which cannot be anticipated and hence a static concept of RNR cannot be reference. The commitment to a low and stable rate, à la Australia and many other federal democracies, is a must. Of course the compensation-cum-reimbursement incentive can remain, but more in the nature of what was done for VAT harmonisation.
Third tier of government
•This new grand bargain must recognise the increasing importance of the third tier of government. Even after 28 years of the 73rd and 74th Amendments, the local governments do not have the promised transfer of funds, functions and functionaries. These local bodies face increased responsibility of providing government services especially in view of increased urbanisation and decentralisation. Of the 12% GST, 10% should be equally shared between the States and the Centre, and 2% must be earmarked exclusively for the urban and rural local bodies, which ensures some basic revenue autonomy to them. The actual distribution across panchayats, districts and cities would be given by respective State Finance Commissions. GST consumption tax paid by every citizen establishes a tighter link between the governed and the government. The quality of governance improves as also, the tax base is better aligned with responsibilities of various tiers of government.
Other changes
•This fresh approach also calls for an overhaul of the interstate GST and the administration of the e-way bill. Research papers by Bhaskar and Kelkar (“Reforming Integrated GST: Towards accelerating exports Policy Brief” by Dr. V. Bhaskar and Dr. Vijay Kelkar and “National Agenda for 2019 – A proposal for the GST reform” by Dr. V. Bhaskar and Dr. Vijay Kelkar — https://bit.ly/3jlXnpo andhttps://bit.ly/3jyb6JB)describe the simplified mechanism, which essentially reduces the transaction costs drastically. The current system is too complex and burdensome. We also need to zero rate exports. GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.
To view environment protection through an ideological or political lens will only spell its doom
•Environment issues are currently at the centre of a heated debate. Even the Congress President, Sonia Gandhi, felt impelled to write on the issue ( The Hindu , Editorial page, “Stop the dismantling of environmental rules”, August 13, 2020). As a former Environment Minister in the United Progressive Alliance (UPA) dispensation, I feel that environment issues should be above political dissonance, and to this end attempt to highlight critical facts which need to be flagged for public knowledge. To politically weaponise environmental issues is unproductive and unacceptable.
How India fares
•It may be politically convenient — but not presenting the complete picture — to express shock at India being ranked at “177 out of 180 countries” in the Environmental Performance Index Report. Besides, in the June 2020 EPI Index, India’s rank stands improved at 168, not 177 which is the 2018 rank.
•The Environmental Performance Index has been developed by two U.S. universities (Yale and Columbia) in collaboration with the World Economic Forum and European Commission and available ranking shows India at 118 in 2006, 123 in 2010, 155 in 2014 and 177 in 2018, thereby giving a message opposite to that sought to be conveyed, regarding our standing at 177 in 2018.
•Also, the experts in the two universities conclude: “... the 2008 ranking suggests that wealth is a major determinant of environmental success.” Any balance between the environment and development needs to be struck within India and based on our priorities, and not some international index.
•Further, the environment index cited by Ms. Gandhi, as explained above, shows a drop of 37 points (namely six points a year) in six years of UPA rule — and 22 points in 4 years (4.5 points a year) — under the present rule. The statistics are self-explanatory.
Political record
•Pointed reference is made to the Narendra Modi government’s alleged preoccupation with “crony capitalism” and implementing “ease of doing business” to the detriment of the environment. This charge ignores the record of UPA governments, when important Group of Minister Committees were set up to implement ease of doing business, as also a special Monitoring Cell in the Cabinet Secretariat. Regardless of affiliation, every government faces this balancing challenge.
•Further, the link between the great winter smog and pollution in North India, and the present draft EIA draft is not reasonable, since winter pollution in North India did not begin in 2014, after Narendra Modi was elected. In point of fact, the winter smog and pollution in North India exemplify the anomalies of federalism, where the imperatives of the Centre and States differ. There are also problems of environmental laws which are effective in principle, against point sources like industries — but not against agriculture-related pollution such as stubble burning or public usage pollution relating to vehicular and household sources. Undoubtedly, big industry has erred grievously in polluting our environment, and the government needs to take stringent steps against violators.
•Ms. Gandhi writes about the problems of Adivasis. However, this problem did not arise in just the last few years. The UPA governments were unable to frame subordinate legislation and implement the Forest Rights Act effectively for eight long years, even in Congress-ruled States. In fact a major dilution of the Forest Rights Act was spearheaded by the Prime Minister’s Office in the UPA dispensation, and office memorandums formalising the dilution were issued despite objections from some quarters. ‘Forests’ was a State subject until transferred to the Concurrent list by the 42nd Amendment Act. However, de facto , the powers of the State governments continue, which is why, regardless of political affiliation, State governments hesitate to fully implement the Forest Rights Act.
Focus on deforestation
•Deforestation ought to be a primary concern of any right-thinking government. Forest clearances for mining and industries, while major, are not the only causes of deforestation. Population pressure due to which the slash-and-burn (or jhoom cycle) has reduced in forest areas from 17-20 years to two-three years giving no time for forest regeneration, and creeping conversion of forest to cultivated land are both major drivers of deforestation; there is also the increasing use of timber for household and industry purposes. However, while diversion of forests for mining and industry is regulated by law and challenged in courts, the other major drivers are not even discussed.
•‘Nirmal Ganga’ can be achieved by zero discharge of effluents and domestic sewerage, but ‘Aviral Ganga’ can only be achieved by constant balancing between irrigation needs of agriculture and potable water for cities on the one hand and the environmental flow of the river on the other.
Crucial dimensions
•The balance of imperatives between the environment and poverty eradication, and the critical need to harmonise the working of the central, State, and local governments, as also intelligence, monitoring and compliance with law are vital dimensions of environment preservation.
•To address environment protection from the standpoint of ideological or political mooring is to sound the death knell of our environment. The environment is a national issue which requires the unwavering participation of all governments, and all citizens, regardless of political affiliation.
